“Defend” Doesn’t Begin to Address Indemnification Procedures

In MSCD 13.334, and in this post, I say the following regarding defend in the witless triplet indemnify, defend, and hold harmless:

Drafters routinely tack defend on to indemnify and hold harmless, but that doesn’t begin to address how defense of nonparty claims is to be handled. To avoid uncertainty and the possibility of dispute, address that explicitly in provisions governing indemnification procedures.

Well, thanks to this post on Francis Pileggi’s Delaware Corporate & Commercial Litigation Blog, I can now point to a Delaware dispute that makes my point for me.

The case is Fillip v. Centerstone Linen Services, LLC, C.A. No.8712-VCG (Del. Ch. Feb. 27, 2014). And here’s the language at issue:

The Company shall indemnify, defend and hold harmless each Manager and Officer for all costs, losses, liabilities, and damages whatsoever paid or incurred by such Manager or Officer in the performance of his duties in such capacity, including, without limitation, reasonable attorney’s fees, expert witness and court costs, to the fullest extent provided or permitted by the Act or other applicable laws. Further, in the event fraud or bad faith claims are asserted against such Manager or Officer, the Company shall nonetheless bear all of the aforesaid expenses subject to the obligation of such Manager or Officer to repay all such expenses if they are finally determined to have committed such fraud or bad faith acts.

The question was whether under this provision the company had an obligation to advance to one of its managers litigation expenses that the manager incurs in defending a counterclaim brought against him by the company.

The court concluded that considering on its own the first sentence in the quoted language, it’s not clear that the company had to advance litigation expenses. But it went on as follows:

The second sentence makes clear that, even in cases of fraud or bad faith, the Company is liable for advancement, subject to an undertaking to repay. The ambiguity in the first sentence is thus cured by reading the Article in its entirety.

So the formula indemnify, defend, and hold harmless is, of course, not up to the task of addressing how litigation expenses are to be handled. In this instance, the plaintiff was fortunate that the following sentence just happened to be phrased in a way that allowed additional meaning to be attached to the first sentence.

If you want it to be clear how indemnification procedures are to be handled, provide specific guidance in the indemnification provisions. Have a look at how my indemnification language (here) handles that. Don’t expect that defend will do the trick.

Posted in Indemnification | 2 Comments

  • AWrightBurkeMPhil

    1/ “Witless triplet” is good!

    2/ Specifying indemnification procedures may indirectly clarify which claims are to be indemnified, but the issue can be directly addressed regardless of procedures. Just say whether the duty applies to disputes between the parties or only to those between the indemnified party and a nonparty.

    • http://www.adamsdrafting.com/ Ken Adams

      The issue you refer to is different from the issue addressed in the Fillip case, which was whether someone who is entitled to indemnification gets their litigation expenses paid in advance.